“Where are interest rates going?”
Actually, that isn’t really that shocking of a question, but all the blog tutorials say I should use “Shocking” or “Secrets” in the headline. Oh well.
But there is something really interesting happening with interest rates these days – nothing. And that’s more interesting than you would think.
At the beginning of the year most analysts forecast that interest rates were beginning a slow march upward that would continue throughout the year. Well, we’re 1/3 of the way through the year (yes, that seems impossible) and interest rates dropped in January and pretty much haven’t gone anywhere since.
It’s hard to get a meaningful chart on interest rates, but the closest we have is something called the Fannie Mae 60-day rate. This represents the interest rate that Fannie Mae commits to for 60 days to lenders, meaning that on any given day, this is the rate that a lender can count on getting if they deliver a closed loan to Fannie Mae within 60 days. So, the retail price of a loan – the price you are actually going to pay – is based primarily on the price the lender knows they have to pay. That price is best followed by the FNMA 60-day yield. Clear as mud?
If we look at the chart here, you’ll notice that since mid-January interest rates have stayed in a very narrow range. The bands defining the top and bottom of the range in this chart represent a range of interest rates of about 0.2%, or less than ¼ of 1%. This is an unusually small range for such an extended period of time. It is so unusual, that lots of folks are starting to talk about it.
So what’s going on? It’s all about supply and demand. In the case of the mortgage market it’s somewhat complicated because there are several layers that go into the final pricing equation. So the following is a bit of a simplification, but it covers the basics.
The Federal Reserve has kept prices (long-term interest rates) low by purchasing up to $85 billion a month in U.S. Treasury Certificates and mortgage-backed securities. Since late last year they’ve been tapering off their purchases at a rate of $10 billion every six weeks or so, and announced their most recent round of tapering Wednesday. They are now down to $45 billion per month.
If demand for mortgage-backed securities is way down, in theory that would make interest rates rise. But they haven’t because there’s little supply of the securities, because there is little demand for mortgages. Mortgage originations have recently reached a 17-year low. Refi activity is way off, and purchase activity, hampered by a lack of listings, is down about 15% from last year.
So, working our way back up the chain:
No matter how much lenders can sell pools of loans for, if there aren’t enough borrowers they will keep interest rates low to compete with all the other lenders. We’ve obviously reached a point of really stable equilibrium, but we have no idea how long it will last.
Most analysts still feel certain that in the long run interest rates will rise, but we’ve been given an interesting opportunity to access low rates much longer than we thought. If you are shopping for a home now, you just got lucky.
Casey Fleming, Author – The Loan Guide: How to Get the Best Possible Mortgage
Mortgage Advisor, C2 Financial Corp.
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